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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 29, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13057
POLO RALPH LAUREN CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-2622036
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
650 MADISON AVENUE, NEW YORK, NEW YORK 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-318-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrants were
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
At November 8, 2001, 31,631,037 shares of the registrant's Class A Common Stock,
$.01 par value, were outstanding, 43,280,021 shares of the registrant's Class B
Common Stock, $.01 par value, were outstanding and 22,720,979 shares of the
registrant's Class C Common Stock, $.01 par value were outstanding.
POLO RALPH LAUREN CORPORATION
INDEX TO FORM 10-Q
PART 1. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of September 29, 2001
(Unaudited) and March 31, 2001.................................. 3
Consolidated Statements of Operations for the three and
six months ended September 29, 2001 and September 30,
2000 (Unaudited)................................................ 4
Consolidated Statements of Cash Flows for the six months ended
September 29, 2001 and September 30, 2000 (Unaudited)........... 5-6
Notes to Consolidated Financial Statements...................... 7-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................... 15-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders............. 25-26
Item 6. Exhibits and Reports on Form 8-K................................ 26
2
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEPTEMBER 29, MARCH 31,
2001 2001
--------------- ----------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $141,101 $51,498
Marketable securities 30,651 50,721
Accounts receivable, net of allowances of $13,063 and $12,090 279,620 269,010
Inventories 419,511 425,594
Deferred tax assets 34,765 31,244
Prepaid expenses and other 52,954 73,654
--------------- ----------------
TOTAL CURRENT ASSETS 958,602 901,721
Property and equipment, net 325,327 328,929
Deferred tax assets 65,159 61,056
Goodwill, net 246,054 249,391
Other assets, net 87,308 84,996
--------------- ----------------
$1,682,450 $1,626,093
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes and acceptances payable - banks $58,096 $86,112
Accounts payable 176,930 178,293
Income taxes payable 44,066 -
Accrued expenses and other 111,669 175,172
--------------- ----------------
TOTAL CURRENT LIABILITIES 390,761 439,577
Long-term debt 305,551 296,988
Other noncurrent liabilities 84,193 80,219
Stockholders' equity
Common Stock
Class A, par value $.01 per share; 500,000,000 shares
authorized; 35,480,543 and 34,948,730 shares issued 354 349
Class B, par value $.01 per share; 100,000,000 shares
authorized; 43,280,021 shares issued and outstanding 433 433
Class C, par value $.01 per share; 70,000,000 shares
authorized; 22,720,979 shares issued and outstanding 227 227
Additional paid-in-capital 475,676 463,001
Retained earnings 508,913 430,047
Treasury Stock, Class A, at cost (3,876,506 and 3,771,806 shares) (73,246) (71,179)
Accumulated other comprehensive loss (7,770) (10,529)
Unearned compensation (2,642) (3,040)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 901,945 809,309
--------------- ----------------
$1,682,450 $1,626,093
=============== ================
See accompanying notes to consolidated financial statements.
3
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------ ------------------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
---------------- ----------------- ----------------- ----------------
Net sales $528,202 $518,360 $989,260 $953,221
Licensing revenue 67,493 67,857 124,264 120,293
---------------- ----------------- ----------------- ----------------
NET REVENUES 595,695 586,217 1,113,524 1,073,514
Cost of goods sold 310,055 336,084 565,522 570,834
---------------- ----------------- ----------------- ----------------
GROSS PROFIT 285,640 250,133 548,002 502,680
Selling, general and administrative expenses 199,507 218,617 408,281 425,017
Restructuring charges - 128,571 - 128,571
---------------- ----------------- ----------------- ----------------
INCOME (LOSS) FROM OPERATIONS 86,133 (97,055) 139,721 (50,908)
Foreign currency loss 5,664 - 2,837 -
Interest expense 4,779 6,783 10,703 13,288
---------------- ----------------- ----------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES 75,690 (103,838) 126,181 (64,196)
Income tax provision (benefit) 27,880 (41,017) 47,318 (25,358)
---------------- ----------------- ----------------- ----------------
NET INCOME (LOSS) $47,810 ($62,821) $78,863 ($38,838)
================ ================ ================= =================
Net income (loss) per share - Basic $0.49 ($0.65) $0.81 ($0.40)
================ ================= ================= ================
Net income (loss) per share - Diluted $0.49 ($0.65) $0.80 ($0.40)
================ ================= ================= ================
Weighted average common shares outstanding - Basic 97,437,461 96,713,414 97,273,124 96,902,715
================ ================= ================= ================
Weighted average common shares outstanding - Diluted 98,483,031 97,256,321 98,454,113 97,273,904
================ ================= ================= ================
See accompanying notes to consolidated financial statements.
4
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
----------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
--------------- ----------------
Cash flows from operating activities
Net income (loss) $78,863 ($38,838)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 44,737 41,145
Deferred income taxes (9,517) (33,001)
Provision for restructuring charges - 98,836
Provision for losses on accounts receivable 698 912
Other (2,684) (1,076)
Changes in assets and liabilities, net of acquisitions
Accounts receivable (14,237) (24,302)
Inventories 1,320 (45,857)
Prepaid expenses and other 26,461 (10,689)
Other assets 1,376 8,947
Accounts payable 581 9,298
Income taxes payable, accrued expenses and other (2,519) 18,889
-------------- ----------------
Net cash provided by operating activities 125,079 24,264
-------------- ----------------
Cash flows from investing activities
Purchases of property and equipment, net (40,242) (46,324)
Investments in marketable securities 21,228 (66,248)
Acquisition, net of cash acquired - (20,929)
Cash surrender value - officers' life insurance (1,540) (2,296)
-------------- ----------------
Net cash used in investing activities (20,554) (135,797)
-------------- ----------------
Cash flows from financing activities
Repurchases of common stock (2,067) (10,479)
Proceeds from issuance of common stock 11,882 -
Repayments of short-term borrowings, net (24,379) 42,094
-------------- ----------------
Net cash (used in) provided by financing activities (14,564) 31,615
-------------- ----------------
Effect of exchange rate changes on cash (358) (5,220)
-------------- ----------------
Net increase (decrease) in cash and cash equivalents 89,603 (85,138)
Cash and cash equivalents at beginning of period 51,498 164,571
-------------- ----------------
Cash and cash equivalents at end of period $141,101 $79,433
============== ================
See accompanying notes to consolidated financial statements.
5
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
------------------------------------
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
----------------- ----------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $3,018 $4,034
================= ================
Cash (refunded) paid for income taxes ($25,716) $17,946
================= ================
See accompanying notes to consolidated financial statements.
6
POLO RALPH LAUREN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000 IS UNAUDITED)
(IN THOUSANDS, EXCEPT WHERE OTHERWISE INDICATED)
1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of Polo Ralph Lauren Corporation ("PRLC") and its wholly and
majority owned subsidiaries (collectively referred to as the "Company",
"we", "us", and "our"). The consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosure normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted from this report as is permitted by such rules and regulation;
however, the Company believes that the disclosures are adequate to make the
information presented not misleading. The consolidated balance sheet data
for March 31, 2001 is derived from the audited financial statements which
are included in the Company's report on Form 10-K, which should be read in
conjunction with these financial statements.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
the consolidated financial condition, results of operations, and changes in
cash flows of the Company for the interim periods presented.
2 RESTRUCTURING AND SPECIAL CHARGES
(a) 2001 OPERATIONAL PLAN
During the second quarter of fiscal 2001, we completed an internal
operational review and formalized our plans to enhance the growth of our
worldwide luxury retail business, to better manage inventory and to
increase our overall profitability (the "Operational Plan"). The major
initiatives of the Operational Plan included: refining our retail strategy;
developing efficiencies in our supply chain; and consolidating corporate
strategic business functions and internal processes.
In connection with refining our retail strategy, we closed all 12 Polo
Jeans Co. full-price retail stores and 11 under-performing Club Monaco
retail stores. Costs associated with this aspect of the Operational Plan
included lease and contract termination costs, store fixed asset write
downs (primarily leasehold improvements of $21.5 million) and severance and
termination benefits.
7
Additionally, as a result of changes in market conditions combined with
our change in retail strategy in certain locations in which we operate
full-price retail stores, we performed an evaluation of the recoverability
of the assets of certain of these stores in accordance with SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. We concluded from the results of this evaluation
that a significant permanent impairment of long-lived assets had occurred.
Accordingly, we recorded a write down of these assets (primarily leasehold
improvements) to their estimated fair value based on discounted future cash
flows.
In connection with the implementation of the Operational Plan, we
recorded a pretax restructuring charge of $128.6 million in the second
quarter of fiscal 2001, subsequently adjusted for a $5.0 million reduction
of liabilities in the fourth quarter of fiscal 2001. The activity for the
six months ended September 29, 2001, was as follows:
LEASE AND
SEVERANCE AND CONTRACT
TERMINATION TERMINATION OTHER
BENEFITS COSTS COSTS TOTAL
-------- ----- ----- -----
Balance at March 31, 2001..... $ 2,942 $ 4,169 $ 782 $ 7,893
2002 activity................. (1,489) (2,234) (284) (4,007)
------- --------- ------ --------
Balance at September 29, 2001 $ 1,453 $ 1,935 $ 498 $ 3,886
======= ========= ====== ========
Total severance and termination benefits as a result of the Operational
Plan related to approximately 550 employees, 490 of whom have been
terminated as of September 29, 2001. Total cash outlays related to the
Operational Plan are expected to be approximately $24.7 million, $20.8
million of which have been paid to date. We are in the final stages of
completing the Operational Plan and expect to settle the remaining
liabilities in accordance with contract terms which extend until fiscal
2003.
(b) 1999 RESTRUCTURING PLAN
During the fourth quarter of fiscal 1999, we formalized our plans to
streamline operations within our wholesale and retail operations and reduce
our overall cost structure ("Restructuring Plan"). The major initiatives of
the Restructuring Plan included the following: (1) an evaluation of our
retail operations and site locations; (2) the realignment and operational
integration of our wholesale operating units; and (3) the realignment and
consolidation of corporate strategic business functions and internal
processes.
In connection with the implementation of the Restructuring Plan, we
recorded a pretax restructuring charge of $58.6 million in our fourth
quarter of fiscal 1999. The activity for the six months ended September 29,
2001, was as follows:
8
LEASE AND
SEVERANCE AND CONTRACT
TERMINATION TERMINATION
BENEFITS COSTS TOTAL
-------- ----- -----
Balance at March 31, 2001.... $ 4,246 $ 1,747 $ 5,993
2002 activity................ (1,590) (521) (2,111)
-------- -------- --------
Balance at September 29, 2001 $ 2,656 $ 1,226 $ 3,882
======== ======== =======
Total severance and termination benefits as a result of the
Restructuring Plan related to approximately 280 employees, all of whom have
been terminated. Total cash outlays related to the Restructuring Plan are
approximately $39.5 million, $35.6 million of which have been paid to date.
We completed the implementation of the Restructuring Plan in fiscal 2000
and expect to settle the remaining liabilities in accordance with contract
terms that extend until fiscal 2003.
3 INVENTORIES
Inventories are valued at lower of cost (first-in, first-out, "FIFO")
or market and consist of the following:
SEPTEMBER 29, MARCH 31,
2001 2001
---- ----
Raw materials $ 4,276 $ 7,024
Work-in-process 7,366 6,251
Finished goods 407,869 412,319
--------- --------
$ 419,511 $425,594
========= ========
4 COMPREHENSIVE INCOME
For the three and six months ended September 29, 2001 and September 30,
2000, comprehensive income was as follows:
THREE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
Net Income (loss) $ 47,810 $ (62,821)
Other comprehensive income (loss),
net of taxes:
Foreign currency
translation adjustments (1,709) 8,881
Unrealized losses on cash
flow hedge contracts, net (1,825) -
--------- ---------
Comprehensive Income (Loss) $ 44,276 $ (53,940)
========= =========
9
The income tax effect related to foreign currency translation
adjustments and unrealized losses on cash flow hedge contracts, net was a
benefit of $2.1 million in the three months ended September 29, 2001 and an
expense of $5.8 million in the three months ended September 30, 2000.
SIX MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
---- ----
Net Income (loss) $ 78,863 $ (38,838)
Other comprehensive income (loss),
net of taxes:
Foreign currency translation
adjustments 712 3,474
Cumulative transition adjustment
gains, net 4,028 -
Unrealized losses on cash flow
hedge contracts, net (1,981) -
-------- --------
Comprehensive Income (Loss) $ 81,622 $ (35,364)
======== =========
The income tax effect related to foreign currency translation
adjustments, cumulative transition adjustment gains, net and unrealized
losses on cash flow hedge contracts, net was an expense of $1.7 million in
the six months ended September 29, 2001 and an expense of $2.3 million in
the six months ended September 30, 2000.
5 SEGMENT REPORTING
Our operations are comprised of three reportable business segments:
wholesale, retail and licensing. Our reportable segments are individual
business units that offer different products and services and are managed
separately because each segment requires different strategic initiatives,
promotional campaigns, marketing and advertising, based upon its own
individual positioning in the market. Additionally, these segments reflect
the reporting basis used internally by senior management to evaluate
performance and the allocation of resources.
The Company measures segment profit as income (loss) from operations
before foreign currency gains and losses, interest, and taxes. Summarized
below are our net revenues and income from operations for the three and six
months ended September 29, 2001 and September 30, 2000, by segment:
10
THREE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
NET REVENUES:
Wholesale $ 280,437 $ 262,542
Retail 247,765 255,818
Licensing 67,493 67,857
------------ ------------
$ 595,695 $ 586,217
============ ============
INCOME (LOSS) FROM OPERATIONS:
Wholesale $ 28,723 $ 26,024
Retail 14,966 16,625
Licensing 42,444 44,800
------------ ------------
86,133 87,449
Less: Unallocated restructuring and
non-recurring charges - 184,504
------------ ------------
$ 86,133 $ (97,055)
============ ============
SIX MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
NET REVENUES:
Wholesale $ 525,610 $ 488,696
Retail 463,650 464,525
Licensing 124,264 120,293
------------ ------------
$ 1,113,524 $ 1,073,514
============ ============
INCOME (LOSS) FROM OPERATIONS
Wholesale $ 49,690 $ 47,288
Retail 18,933 16,564
Licensing 71,098 69,744
------------ ------------
139,721 133,596
Less: Unallocated restructuring and
non-recurring charges - 184,504
------------ ------------
$ 139,721 $ (50,908)
============ ============
11
Summarized below are our net revenues for the three and six months ended
September 29, 2001 and September 30, 2000 and our long-lived assets as of
September 29, 2001 and March 31, 2001, by geographic location:
THREE MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
NET REVENUES:
United States $ 523,453 $ 522,847
Foreign countries 72,242 63,370
------------- ------------
$ 595,695 $ 586,217
============= ============
SIX MONTHS ENDED
SEPTEMBER 29, SEPTEMBER 30,
2001 2000
NET REVENUES:
United States $ 928,636 $ 917,680
Foreign Countries 184,888 155,834
------------- ------------
$ 1,113,524 $ 1,073,514
============= ============
SEPTEMBER 29, MARCH 31,
2001 2001
LONG-LIVED ASSETS:
United States $ 278,730 $ 286,257
Foreign countries 46,597 42,672
------------- ------------
$ 325,327 $ 328,929
============= ============
6. RECENTLY ISSUED PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Statement
requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for the first quarter in the
fiscal year ending April 3, 2004. We do not believe that the adoption of
this pronouncement will have a material impact on our consolidated results
of operations.
12
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. The Statement addresses
financial accounting and reporting for the impairment of long-lived assets
and for long-lived assets to be disposed of. SFAS No. 144 supersedes FASB
Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. However, this Statement retains
the fundamental provisions of Statement 121 for (a) recognition and
measurement of the impairment of long-lived assets to be held and used and
(b) measurement of long-lived assets to be disposed of by sale. SFAS No.
144 is effective for the first quarter in the fiscal year ending March 29,
2003. We do not believe that the adoption of this pronouncement will have a
material impact on our consolidated results of operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 141, BUSINESS COMBINATIONS and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. In addition to requiring the use of
the purchase method for all business combinations, SFAS No. 141 requires
intangible assets that meet certain criteria to be recognized as assets
apart from goodwill. SFAS No. 142 addresses accounting and reporting
standards for acquired goodwill and other intangible assets and generally,
requires that goodwill and indefinite life intangible assets no longer be
amortized but be tested for impairment annually. Intangible assets that
have finite lives will continue to be amortized over their useful lives.
SFAS No. 141 and SFAS No. 142 are effective for our first quarter in the
fiscal year ending March 29, 2003 or for any business combinations
initiated after June 30, 2001. The impact of these statements on the
Company's consolidated financial statements is currently being evaluated.
In April 2001, the FASB's Emerging Issues Task Force reached a
consensus on Issue No. 00-25, VENDOR INCOME STATEMENT CHARACTERISTICS OF
CONSIDERATION PAID TO A RESELLER OF THE VENDOR'S PRODUCTS ("EITF No.
00-25"). EITF No. 00-25 concluded that consideration from a vendor to a
reseller of the vendor's products is presumed to be a reduction of the
selling prices of the vendor's products and, therefore, should be
characterized as a reduction of revenue when recognized in the vendor's
income statement. That presumption is overcome and the consideration
characterized as a cost incurred if a benefit is or will be received from
the recipient of the consideration if certain conditions are met. This
pronouncement is effective for our first quarter in the fiscal year ending
March 29, 2003. The Company is currently evaluating the impact of adopting
this pronouncement on our consolidated results of operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires the recognition of all
derivatives, whether designated in hedging relationships or not, as either
assets or liabilities in the statement of financial position, and
measurement of those instruments at fair value. The accounting for changes
in the fair value of a derivative is dependent upon the intended use of the
derivative. SFAS No. 133 defines new requirements for designation and
documentation of hedging relationships as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does
not qualify as a hedge, changes in fair value will be recognized in
earnings.
13
We adopted the provisions of SFAS No. 133 as of April 1, 2001. As of
this date, we had outstanding interest rate swap agreements and forward
foreign exchange contracts that qualify as cash flow hedges under SFAS No.
133. In accordance with SFAS No. 133, we recorded the fair value of these
derivatives at April 1, 2001, and the resulting net unrealized gain, after
taxes, of approximately $4.0 million was recorded in other comprehensive
income as a cumulative transition adjustment.
7 SUBSEQUENT EVENT
On October 31, 2001, we acquired PRL Fashions of Europe SRL ("PRL
Fashions") which holds licenses to sell our women's Ralph Lauren apparel in
Europe, our men's and boys' Polo Ralph Lauren apparel in Italy and men's
and women's Polo Jeans Co. collections in Italy. PRL Fashions had revenues
of approximately $75.0 million for calendar year 2000. The purchase price
of this transaction was approximately $22.0 million in cash plus earn-out
payments based on achieving profitability targets over the first three
years with a guaranteed minimum annual payment of $3.5 million each year.
On October 22, 2001, we acquired the Polo Brussels SA store from one of
our licensees. The purchase price of this transaction was approximately
$3.0 million in cash. Consistent with SFAS No. 141 and SFAS No. 142, the
transactions will be accounted for as a purchase and when determined, the
goodwill, if any, will not be amortized.
14
POLO RALPH LAUREN CORPORATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO WHICH ARE
INCLUDED HEREIN. WE UTILIZE A 52-53 WEEK FISCAL YEAR ENDING ON THE SATURDAY
NEAREST MARCH 31. FISCAL YEARS 2002 AND 2001 END ON MARCH 30, 2002 AND MARCH 31,
2001, RESPECTIVELY. DUE TO THE COLLABORATIVE AND ONGOING NATURE OF OUR
RELATIONSHIPS WITH OUR LICENSEES, SUCH LICENSEES ARE REFERRED TO HEREIN AS
"LICENSING PARTNERS" AND THE RELATIONSHIPS ARE REFERRED TO HEREIN AS "LICENSING
ALLIANCES." NOTWITHSTANDING THESE REFERENCES, HOWEVER, THE LEGAL RELATIONSHIP
BETWEEN OUR LICENSEES AND US IS ONE OF LICENSOR AND LICENSEE, AND NOT ONE OF
PARTNERSHIP.
CERTAIN STATEMENTS IN THIS FORM 10-Q AND IN FUTURE FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION, IN OUR PRESS RELEASES AND IN ORAL STATEMENTS MADE BY OR
WITH THE APPROVAL OF AUTHORIZED PERSONNEL CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND
ARE INDICATED BY WORDS OR PHRASES SUCH AS "ANTICIPATE," "ESTIMATE," "EXPECT,"
"PROJECT," " WE BELIEVE," "IS OR REMAINS OPTIMISTIC," "CURRENTLY ENVISIONS" AND
SIMILAR WORDS OR PHRASES AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO
BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE,
AMONG OTHERS, THE FOLLOWING: RISKS ASSOCIATED WITH A GENERAL ECONOMIC DOWNTURN
AND OTHER EVENTS LEADING TO A REDUCTION IN DISCRETIONARY CONSUMER SPENDING;
RISKS ASSOCIATED WITH IMPLEMENTING THE COMPANY'S PLANS TO ENHANCE ITS WORLDWIDE
LUXURY RETAIL BUSINESS, INVENTORY MANAGEMENT PROGRAM AND OPERATING EFFICIENCY
INITIATIVES; RISKS ASSOCIATED WITH CHANGES IN THE COMPETITIVE MARKETPLACE,
INCLUDING THE INTRODUCTION OF NEW PRODUCTS OR PRICING CHANGES BY OUR
COMPETITORS; CHANGES IN GLOBAL ECONOMIC CONDITIONS; RISKS ASSOCIATED WITH OUR
DEPENDENCE ON SALES TO A LIMITED NUMBER OF LARGE DEPARTMENT STORE CUSTOMERS,
INCLUDING RISKS RELATED TO EXTENDING CREDIT TO CUSTOMERS; RISKS ASSOCIATED WITH
OUR DEPENDENCE ON OUR LICENSING PARTNERS FOR A SUBSTANTIAL PORTION OF OUR NET
INCOME AND RISKS ASSOCIATED WITH A LACK OF OPERATIONAL AND FINANCIAL CONTROL
OVER LICENSED BUSINESSES; RISKS ASSOCIATED WITH FINANCIAL DISTRESS OF LICENSEES,
INCLUDING THE IMPACT ON OUR NET INCOME AND BUSINESS OF ONE OR MORE LICENSEE'S
REORGANIZATION; RISKS ASSOCIATED WITH CONSOLIDATIONS, RESTRUCTURINGS AND OTHER
OWNERSHIP CHANGES IN THE RETAIL INDUSTRY; RISKS ASSOCIATED WITH COMPETITION IN
THE SEGMENTS OF THE FASHION AND CONSUMER PRODUCT INDUSTRIES IN WHICH WE OPERATE,
INCLUDING OUR ABILITY TO SHAPE, STIMULATE AND RESPOND TO CHANGING CONSUMER
TASTES AND DEMANDS BY PRODUCING ATTRACTIVE PRODUCTS, BRANDS AND MARKETING, AND
OUR ABILITY TO REMAIN COMPETITIVE IN THE AREAS OF QUALITY AND PRICE; RISKS
ASSOCIATED WITH UNCERTAINTY RELATING TO OUR ABILITY TO IMPLEMENT OUR GROWTH
STRATEGIES; RISKS ASSOCIATED WITH OUR ENTRY INTO NEW MARKETS EITHER THROUGH
INTERNAL DEVELOPMENT ACTIVITIES OR THROUGH ACQUISITIONS; RISKS ASSOCIATED WITH
THE POSSIBLE ADVERSE IMPACT OF OUR UNAFFILIATED MANUFACTURERS' INABILITY TO
MANUFACTURE IN A TIMELY MANNER, TO MEET QUALITY STANDARDS OR TO USE ACCEPTABLE
LABOR PRACTICES; RISKS ASSOCIATED WITH CHANGES IN SOCIAL, POLITICAL, ECONOMIC
AND OTHER CONDITIONS AFFECTING FOREIGN OPERATIONS, AND SOURCING AND THE POSSIBLE
ADVERSE IMPACT OF CHANGES IN IMPORT RESTRICTIONS; RISKS RELATED TO OUR ABILITY
TO ESTABLISH AND
15
PROTECT OUR TRADEMARKS AND OTHER PROPRIETARY RIGHTS; RISKS RELATED TO
FLUCTUATIONS IN FOREIGN CURRENCY AFFECTING OUR FOREIGN SUBSIDIARIES' AND FOREIGN
LICENSEES' RESULTS OF OPERATIONS AND THE RELATIVE PRICES AT WHICH WE AND OUR
FOREIGN COMPETITORS SELL PRODUCTS IN THE SAME MARKET AND OUR OPERATING AND
MANUFACTURING COSTS OUTSIDE OF THE UNITED STATES; AND, RISKS ASSOCIATED WITH OUR
CONTROL BY LAUREN FAMILY MEMBERS AND THE ANTI-TAKEOVER EFFECT OF MULTIPLE
CLASSES OF STOCK. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.
OVERVIEW
We began operations in 1968 as a designer and marketer of premium quality
men's clothing and sportswear. Since our inception, we have grown through
increased sales of existing product lines, the introduction of new brands and
products, expansion into international markets, development of our retail
operations and acquisitions. Our net revenues are generated from our three
integrated operations: wholesale, retail and licensing.
RESULTS OF OPERATIONS
The table below sets forth the percentage relationship to net revenues of
certain items in our statements of operations for the three and six months ended
September 29, 2001 and September 30, 2000:
SEPTEMBER 29, 2001 SEPTEMBER 30, 2000
THREE SIX THREE SIX
MONTHS MONTHS MONTHS MONTHS
------ ------ ------ ------
Net sales .............................. 88.7% 88.8% 88.4% 88.8%
Licensing revenue ...................... 11.3 11.2 11.6 11.2
----- ----- ----- -----
Net revenues ........................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Gross profit ........................... 48.0 49.2 42.7 46.8
Selling, general and administrative
expense ................................ 33.5 36.7 37.3 39.6
Restructuring charges .................. - - 21.9 12.0
----- ----- ----- -----
Income (loss) from operations .......... 14.5 12.5 (16.5) (4.8)
Foreign currency losses ................ 1.0 0.3 - -
Interest expense ....................... 0.8 0.9 1.2 1.2
----- ----- ----- -----
Income (loss) before income
taxes .................................. 12.7% 11.3% (17.7)% (6.0)%
===== ===== ===== =====
16
THREE MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2000
NET SALES. Net sales increased 1.9% to $528.2 million in the three months
ended September 29, 2001, from $518.4 million in the three months ended
September 30, 2000. Wholesale net sales increased 6.8% to $280.4 million in the
three months ended September 30, 2001, from $262.5 million in the corresponding
period of fiscal 2001. Wholesale growth primarily reflects increased sales of
existing products, principally from our international wholesale business in
Europe and our men's business.
Retail sales decreased by 3.1% to $247.8 million in the three months ended
September 29, 2001, from $255.8 million in the corresponding period in fiscal
2001. This decrease is primarily driven by the 5.0% decrease in comparable store
sales. Although our stores remain productive, the comparable store declines were
due to the effects of a promotionally driven and highly competitive retail store
environment exacerbated by decreased customer spending resulting from the
September 11th events. Additionally, we had one net store closing in the three
months ended September 29, 2001.
At September 29, 2001, we operated 231 stores, including 28 Polo brand
stores, nine Polo concept stores, 64 Club Monaco full-price stores, 93 Polo full
line outlet stores, 25 Polo Jeans Co. outlet stores, 12 European outlet stores
and nine Club Monaco outlet stores.
LICENSING REVENUE. Licensing revenue decreased 0.5% to $67.5 million in the
three months ended September 29, 2001, from $67.9 million in the corresponding
period of fiscal 2001. This decrease is primarily attributable to decreased
royalty revenue from a significant product licensee.
GROSS PROFIT. Gross profit as a percentage of net revenues increased to
48.0% in the three months ended September 29, 2001, from 42.7% in the
corresponding period of fiscal 2001. This increase was mainly attributed to
$37.9 million of inventory write-downs recorded in the second quarter of fiscal
2001 in connection with the implementation of our company's Operational Plan and
our decision to accelerate the disposition of aged inventory. Wholesale gross
margins decreased, and retail gross margins were negatively impacted by higher
promotional markdowns due to the difficult economic environment and decreased
customer spending since September 11th.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses as a percentage of net revenues decreased to
33.5% in the three months ended September 29, 2001, from 37.3% of net revenues
in the corresponding period of fiscal 2001. This decrease is due to ongoing
expense initiatives and expense reductions at the retail and corporate level.
Additionally, in the six months ended September 30, 2000 in connection with our
fiscal 2001 Operational Plan, we closed 23 full-price stores that carried high
operating expense margins and recorded a charge of $18.1 million relating to
non-recurring charges associated with targeted opportunities for improvement and
other employee related costs.
17
INTEREST AND OTHER EXPENSE. Interest expense decreased to $4.8 million in
the three months ended September 29, 2001, from $6.8 million in the comparable
period in fiscal 2001. This decrease was due to lower levels of borrowings
during the current quarter primarily as a result of repurchases of a portion of
our outstanding Euro debt in fiscal 2001 and the repayment of short term
borrowings during the current quarter.
INCOME TAXES. The effective tax rate decreased to 36.8% in the three months
ended September 29, 2001, from 39.5% in the corresponding period in fiscal 2001.
This decline is primarily a result of the benefit of tax strategies implemented.
The three months ended September 30, 2000 included a tax benefit of $72.9
million resulting from charges recorded in connection with the Operational Plan.
SIX MONTHS ENDED SEPTEMBER 29, 2001 COMPARED TO
SIX MONTHS ENDED SEPTEMBER 30, 2000
NET SALES. Net sales increased 3.8% to $989.3 million in the six months
ended September 29, 2001, from $953.2 million in the six months ended September
30, 2000. Wholesale net sales increased 7.6% to $525.6 million in the six months
ended September 29, 2001, from $488.7 million in the corresponding period of
fiscal 2001. Wholesale growth primarily reflects increased unit sales of
existing products, principally from our international wholesale business in
Europe and our domestic women's and men's business.
Retail sales decreased by 0.2% to $463.7 million in the six months ended
September 29, 2001, from $464.5 million in the corresponding period in fiscal
2001. This decrease is primarily attributable to the closing of our Polo Jeans
Co. full-price retail stores during the second quarter of fiscal 2001 in
connection with our Operational Plan offset by the increase in our outlet stores
and international retail stores sales.
Additionally, comparable store sales, which represent net sales of stores
open in both reporting periods for the full portion of such periods, decreased
3.9%. Although our stores remain productive, the comparable store declines were
due to the effects of a promotionally driven and highly competitive retail store
environment exacerbated by the decreased customer spending resulting from the
events on September 11th . At September 29, 2001, we operated 231 stores,
including 28 Polo brand stores, nine Polo concept stores, 64 Club Monaco
full-price stores, 93 Polo full line outlet stores, 25 Polo Jeans Co. outlet
stores, 12 European outlet stores and nine Club Monaco outlet stores.
LICENSING REVENUE. Licensing revenue increased 3.3% to $124.3 million in
the six months ended September 29, 2001, from $120.3 million in the
corresponding period of fiscal 2001. This increase is primarily due to strong
results from our international businesses, particularly in Asia, offset by
decreased royalty revenue from a significant product licensee.
18
GROSS PROFIT. Gross profit as a percentage of net revenues increased to
49.2% in the six months ended September 29, 2001, from 46.8% in the
corresponding period of fiscal 2001. This increase was mainly attributed to
$37.9 million of inventory write-downs recorded in the second quarter of fiscal
2001 in connection with the implementation of our company's Operational Plan and
our decision to accelerate the disposition of aged inventory. Wholesale gross
margins decreased due to an increase in off-price sales and allowances as a
result of the softer economic environment. Retail gross margins decreased in
comparison to last year's corresponding six month period due to higher levels of
markdowns due to the current economic environment and decreased customer
spending resulting from the events of September 11th. These decreases were
partially offset by increases in licensing revenue that has no associated cost
of goods sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses as a percentage of net revenues decreased to
36.7% in the six months ended September 29, 2001, from 39.6% of net revenues in
the corresponding period of fiscal 2001. This decrease in SG&A expenses as a
percentage of net revenues was primarily due to expense reduction initiatives
across all business segments. Additionally, in the six months ended September
30, 2000 in connection with our fiscal 2001 Operational Plan, we closed 23
full-price stores that carried high operating expense margins and recorded a
charge of $18.1 million relating to non-recurring charges associated with
targeted opportunities for improvement and other employee-related costs.
INTEREST AND OTHER EXPENSE. Interest expense decreased to $10.7 million in
the six months ended September 29, 2001, from $13.3 million in the comparable
period in fiscal 2001. This decrease was due to lower levels of borrowings
during the current period primarily as a result of repurchases of a portion of
our outstanding Euro debt in fiscal 2001 and the repayment of short term
borrowings during the period.
INCOME TAXES. The effective tax rate decreased to 37.5% in the six months
ended September 29, 2001, from 39.5% in the corresponding period in fiscal 2001.
This decline is primarily a result of the benefit of tax strategies implemented.
The six months ended September 30, 2000 included a tax benefit of $72.9 million
resulting from charges recorded in connection with the Operational Plan.
LIQUIDITY AND CAPITAL RESOURCES
Our cash requirements primarily derive from working capital needs,
construction and renovation of shop-within-shops, retail expansion and other
corporate activities. Our main sources of liquidity are cash flows from
operations, credit facilities and other borrowings.
Net cash provided by operating activities increased to $125.1 million in
the six months ended September 29, 2001, from $24.3 million in the comparable
period in fiscal 2001. Net cash provided by operating activities in fiscal 2001
was negatively impacted by charges recorded in connection with the
implementation of the Operational Plan. Net cash used in investing activities
decreased to $20.6 million in the six months ended September 29, 2001 from
$135.8 million in the comparable period in fiscal 2001. This decrease
principally reflects the use of cash to complete the acquisition of our European
license and the investment in marketable securities of $66.2 million in the six
months ended September 30, 2000. Net cash used in financing activities was $14.6
million in the
19
six months ended September 29, 2001, as compared to net cash provided by
financing activities of $31.6 million, in the comparable period in fiscal 2001.
This change is primarily due to the use of funds to repay short-term borrowings
during the six months ended September 29, 2001.
In June 1997, we entered into a credit facility with a syndicate of banks
which provides for a $225.0 million revolving line of credit available for the
issuance of letters of credit, acceptances and direct borrowings and matures on
December 31, 2002. Borrowings under the credit facility bear interest, at our
option, (i) at a Base Rate equal to the higher of the Federal Funds Rate, as
published by the Federal Reserve Bank of New York, plus 1/2 of one percent; and
the prime commercial lending rate of The Chase Manhattan Bank in effect from
time to time, or (ii) at the Eurodollar Rate plus an interest margin.
In March 1999, we entered into a $100.0 million senior credit facility with
a syndicate of banks consisting of a $20.0 million revolving line of credit and
an $80.0 million term loan. The revolving line of credit is available for
working capital needs and general corporate purposes and matures on June 30,
2003. The term loan was used to finance the acquisition of all of the
outstanding common stock of Club Monaco Inc. and to repay their indebtedness.
The term loan is also repayable on June 30, 2003. Borrowings under the 1999
senior credit facility bear interest, at our option, at a Base Rate equal to the
higher of: (i) the Federal Funds Rate, as published by the Federal Reserve Bank
of New York, plus 1/2 of one percent; and (ii) the prime commercial lending rate
of The Chase Manhattan Bank in effect from time to time, or at the Eurodollar
Rate plus an interest margin. In April 1999, we entered into interest rate swap
agreements with an aggregate notional amount of $100.0 million to convert the
variable interest rate on the 1999 senior credit facility to a fixed rate of
5.5%.
The syndicated bank credit facility and 1999 senior credit facility contain
customary representations, warranties, covenants and events of default,
including covenants regarding maintenance of net worth and leverage ratios,
limitations on indebtedness, loans, investments and incurrences of liens, and
restrictions on sales of assets and transactions with affiliates. Additionally,
the agreements provide that an event of default will occur if Mr. Ralph Lauren
and related entities fail to maintain a specified minimum percentage of the
voting power of our common stock.
In November 1999, we issued Euro 275.0 million of 6.125% notes due November
2006. Our Euro debt is listed on the London Stock Exchange. The net proceeds
from the Euro offering were $281.5 million based on the Euro exchange rate on
the issuance date. Interest on the Euro debt is payable annually. A portion of
the net proceeds from the issuance was used to acquire our European license
while the remaining net proceeds were retained for general corporate purposes.
In fiscal 2001, we repurchased Euro 27.5 million, or $25.3 million based on Euro
exchange rates, of our outstanding Euro debt.
As of September 29, 2001, we had $58.1 million outstanding in direct
borrowings, $80.0 million outstanding under the term loan and $225.6 million
outstanding in Euro debt based on the quarter end exchange rate. We were also
contingently liable for $30.2 million in outstanding letters of credit related
to commitments for the purchase of inventory. The weighted average interest rate
on outstanding borrowings at September 29, 2001, was 6.0%.
20
Total cash outlays related to the fiscal 2001 Operational Plan are expected
to be approximately $24.7 million, $20.8 million of which has been paid through
September 29, 2001. The remaining obligations approximated $3.9 million at
September 29, 2001, and primarily relate to severance and lease termination
agreements, which extend until fiscal 2003.
Total cash outlays related to the 1999 restructuring plan are approximately
$39.5 million, $35.6 million of which has been paid through September 29, 2001.
The remaining obligations approximated $3.9 million at September 29, 2001, and
primarily relate to severance and lease termination agreements, which extend
until fiscal 2003.
Capital expenditures were $40.2 million and $46.3 million in the six months
ended September 29, 2001 and September 30, 2000, respectively. Capital
expenditures primarily reflect costs associated with the following:
o our retail stores;
o the expansion of our European operations;
o the shop-within-shops development program which includes new
shops, renovations and expansions;
o our information systems; and
o other capital projects.
In March 1998, the Board of Directors authorized the repurchase, subject to
market conditions, of up to $100.0 million of our Class A common stock. Share
repurchases under this plan were made in the open market over a two-year period
which commenced April 1, 1998. On March 2, 2000, the Board of Directors
authorized a two-year extension to the stock repurchase program. Shares acquired
under the repurchase program will be used for stock option programs and for
other corporate purposes. As of September 29, 2001, we had repurchased 3,876,506
shares of our Class A common stock at an aggregate cost of $73.2 million.
On October 31, 2001, we acquired PRL Fashions of Europe SRL ("PRL
Fashions") which holds licenses to sell our women's Ralph Lauren apparel in
Europe, our men's and boys' Polo Ralph Lauren apparel in Italy and men's and
women's Polo Jeans Co. collections in Italy. PRL Fashions had revenues of
approximately $75.0 million for calendar year 2000. The purchase price of this
transaction was $22.0 million in cash plus earn-out payments based on achieving
profitability targets over the first three years with a guaranteed minimum
annual payment of $3.5 million every year.
On October 22, 2001, we acquired the Polo Brussels SA store from a
licensee. The purchase price of this transaction was approximately $3.0 million
of cash. Consistent with SFAS No. 141 and SFAS No. 142, the transactions will be
accounted for as a purchase and when determined, the goodwill, if any, will not
be amortized.
We believe that cash from ongoing operations and funds available under our
credit facilities and
21
from our Euro offering will be sufficient to satisfy our current level of
operations, the operational review, the restructuring plan, capital
requirements, the stock repurchase program, the acquisition of PRL Fashions and
the Brussels store and other corporate activities for the next 12 months.
Additionally, we do not currently intend to pay dividends on our common stock in
the next 12 months.
SEASONALITY OF BUSINESS
Our business is affected by seasonal trends, with higher levels of
wholesale sales in our second and fourth quarters and higher retail sales in our
second and third quarters. These trends result primarily from the timing of
seasonal wholesale shipments to retail customers and key vacation travel and
holiday shopping periods in the retail segment. As a result of the growth in our
retail operations and licensing revenue, historical quarterly operating trends
and working capital requirements may not accurately reflect future performances.
In addition, fluctuations in sales and operating income in any fiscal quarter
may be affected by the timing of seasonal wholesale shipments and other events
affecting retail.
NEW ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 143, ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS. This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The Statement requires that
the fair value of a liability for an asset retirement obligation be recognized
in the period in which it is incurred if a reasonable estimate of fair value can
be made. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. SFAS No. 143 is effective for the first
quarter in the fiscal year ending April 3, 2004. We do not believe that the
adoption of this pronouncement will have a material impact on our consolidated
results of operations.
In October 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. The Statement addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS No. 144 supersedes FASB Statement No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF. However, this Statement retains the fundamental
provisions of Statement 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 is effective for the
first quarter in the fiscal year ending March 29, 2003. We do not believe that
the adoption of this pronouncement will have a material impact on our
consolidated results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No.141, BUSINESS COMBINATIONS and SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. In addition to requiring the use of the purchase method for
all business combinations, SFAS No. 141 requires intangible assets that meet
certain criteria to be recognized as assets apart from goodwill. SFAS No. 142
addresses accounting and reporting standards for acquired goodwill and other
intangible assets and generally, requires that goodwill and indefinite life
intangible assets no longer be amortized but be tested for impairment annually.
Intangible assets that have finite lives
22
will continue to be amortized over their useful lives. SFAS No. 141 and SFAS No.
142 are effective for our first quarter in the fiscal year ending March 29, 2003
or for any business combinations initiated after June 30, 2001. The impact of
these statements on the Company's consolidated financial statements is currently
being evaluated.
In April 2001, the FASB's Emerging Issues Task Force reached a consensus on
Issue No. 00-25, VENDOR INCOME STATEMENT CHARACTERISTICS OF CONSIDERATION PAID
TO A RESELLER OF THE VENDOR'S PRODUCTS ("EITF No. 00-25"). EITF No. 00-25
concluded that consideration from a vendor to a reseller of the vendor's
products is presumed to be a reduction of the selling prices of the vendor's
products and, therefore, should be characterized as a reduction of revenue when
recognized in the vendor's income statement. That presumption is overcome and
the consideration characterized as a cost incurred if a benefit is or will be
received from the recipient of the consideration if certain conditions are met.
This pronouncement is effective for our first quarter in the fiscal year ending
March 29, 2003. The Company is currently evaluating the impact of adopting this
pronouncement on our consolidated results of operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This Statement, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires the recognition of all derivatives, whether
designated in hedging relationships or not, as either assets or liabilities in
the statement of financial position, and measurement of those instruments at
fair value. The accounting for changes in the fair value of a derivative is
dependent upon the intended use of the derivative. SFAS No. 133 defines new
requirements for designation and documentation of hedging relationships as well
as ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value will be
recognized in earnings. SFAS No. 133 is effective for our first quarter of our
fiscal year ending March 30, 2002.
We adopted the provisions of SFAS No. 133 as of April 1, 2001. As of this
date, we had outstanding interest rate swap agreements and forward foreign
exchange contracts that qualify as cash flow hedges under SFAS No. 133. In
accordance with SFAS No. 133, we recorded the fair value of these derivatives at
April 1, 2001, and the resulting net unrealized gain, after taxes, of
approximately $4.0 million was recorded in other comprehensive income as a
cumulative transition adjustment.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The market risk inherent in our financial instruments represents the
potential loss in fair value, earnings or cash flows arising from adverse
changes in interest rates or foreign currency exchange rates. We manage these
exposures through operating and financing activities and, when appropriate,
through the use of derivative financial instruments. Our policy allows for the
use of derivative financial instruments for identifiable market risk exposures,
including interest rate and foreign currency fluctuations. Since March 31, 2001,
there have been no significant changes in our interest rate and foreign currency
exposures, changes in the types of derivative instruments used to hedge those
exposures, or significant changes in underlying market conditions.
24
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are from time to time involved in legal actions involving enforcement of
our trademark rights. One of these actions involved a lawsuit we filed on
October 1, 1999 against the United States Polo Association Inc. ("USPA"),
Jordache, Ltd. ("Jordache") and certain other entities affiliated with them,
alleging that the defendants were infringing on our famous trademarks. This
lawsuit continues to proceed as both sides are awaiting the court's decision on
various motions. In connection with this lawsuit, on July 19, 2001, the USPA and
Jordache filed a lawsuit against us in the United States District Court for the
Southern District of New York. This suit, which is effectively a counterclaim by
them in connection with the original trademark action, asserts claims related to
our actions in connection with our pursuit of claims against the USPA and
Jordache for trademark infringement and other unlawful conduct. Their claims
stem from our contacts with the USPA's and Jordache's retailers in which we
informed these retailers of our position in the original trademark action. The
USPA and Jordache seek $50 million in compensatory damages and $50 million in
punitive damages from us. On September 24, 2001, we moved to consolidate this
new suit with the original trademark action for purposes of discovery and trial.
The USPA and Jordache have consented to the request for consolidation. We
believe that the USPA and Jordache's claims are substantially without merit and
intend to pursue our claims and defend against those of the USPA and Jordache
vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
(a) The Annual Meeting of Stockholders of the Company was held on August
16, 2001.
(b) The following directors were elected at the Annual Meeting of
Stockholders to serve until the 2002 Annual Meeting and until their
respective successors are duly elected and qualified:
CLASS A DIRECTOR:
-----------------
Dr. Joyce F. Brown
Allen Questrom
CLASS B DIRECTORS:
-----------------
Ralph Lauren
F. Lance Isham
Roger N. Farah
Frank A. Bennack, Jr.
Joel L. Fleishman
Terry S. Semel
CLASS C DIRECTOR:
-----------------
Richard A. Friedman
(c)(i) Each person elected as a director received the number of votes (shares
of Class B Common Stock are entitled to ten votes per share) indicated
beside his name:
NUMBER OF NUMBER OF
VOTES FOR VOTES WITHHELD
--------- --------------
CLASS A DIRECTOR:
-----------------
Dr. Joyce F. Brown 19,225,030 104,145
Allen Questrom 19,239,306 89,870
CLASS B DIRECTORS:
------------------
Ralph Lauren 432,800,210 -0-
F. Lance Isham 432,800,210 -0-
Roger N. Farah 432,800,210 -0-
Frank A. Bennack, Jr. 432,800,210 -0-
Joel L. Fleishman 432,800,210 -0-
Terry S. Semel 432,800,210 -0-
CLASS C DIRECTOR:
-----------------
Richard A. Friedman 22,720,979 -0-
(ii) 474,805,908 votes were cast for and 6,796 votes were cast against the
ratification of the
25
selection of Deloitte & Touche LLP as the independent auditors of the
Company for the year ending March 30, 2002. Abstentions totaled 37,661;
there were no broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits--
None
(b) Reports on Form 8-K--
The Company filed no reports on Form 8-K in the quarter ended
September 30, 2000.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POLO RALPH LAUREN CORPORATION
Date: November 13, 2001 By: /s/ Gerald M. Chaney
---------------------------------------
Gerald M. Chaney
Senior Vice President of Finance and
Chief Financial Officer
27